It seems that many startups have been costly failures-from Preston Tucker to Daewoo, to the more recent Fiskars car, most of them have been flops. Tesla is the bright spot-but the firm is not profitable, and depends upon Federal subsidies to sell its cars.
It seems to me, that a small firm is at a considerable disadvantage, as:
-making cars requires huge capital investments (you need billions)
-current firms make a very good product-can a new firm design a car that is markedly better?
-advertising and creating a dealership network takes time and lots of $$
-American consumers are risk-averse-they do not want to spend upwards of $30,000 on a car that might turn out to be a dog
Given this, why do entrepreneurs keep trying? Elon Musk should have made a deal with GM or Ford-to make his car and sell it under their names. If nothing else, he would have avoided the enormous start-up costs in setting up his own operation.
I believe Musk/Tesla is not so much about cars as upgrading the state of the art with regard to non-fossil fuel infrastructure. It’s a long-term vision that is already shaking things up. If you have a vision you truly believe in, it makes a certain kind of sense to avoid promoting it under the banner of organizations who have already proven they can fail.
The number of people who have attempted to start car companies since the consolidation of power among five or six manufacturers by the time of WWII is fairly large. The number of successes is near zero. The classic case is Henry Kaiser, who was one of the wealthiest industrialists in the country and nearly broke himself trying to play with GM, Ford and Chrysler.
I think new makers like Tesla that do not fail will end up being absorbed by existing maker conglomerates. I think the odds of, say, Tesla or whatever entity a Google or Apple creates succeeding in its own right are slim to slenderman.
ETA: I’m not dismissing the European and Asian companies who gained big footholds, even dominant positions in the US… but they were established companies long before they tried to play here. I think flat out *startups *in the industry are doomed to either failure or acquisition at a relatively early stage.
Why is that?
It’s possible. It just wouldn’t make any sense.
I am not sure how much money it would take to start an honest-to-God automobile manufacturer that could seriously compete with the existing ones, but the number rhymes with “millions” except it starts with a B. Ford is like the eighth largest car company in the world and sells six million vehicles a YEAR. Last FY their revenue was $144 billion, which makes them, as a financial concern, larger than most sovereign nations.
To create an automotive company would require an absolute mountain of money not only to create the infrastructure and hire the people, but to create the business relationships, supplier networks, dealer networks et al. You need to hire people away from existing manufacturers. You need to figure out who you’re buying the engines from, or else build an engine plant. You need buildings built - an automotive assembly building is unimaginably huge - and that takes a long time. You need all this cash, AND you need a huge cash reserve to absorb the gigantic losses you will take for the first five years of operation if everything goes really well.
If a person wants to go Elon Musk and sponge off the government to build niche cars, well, Elon’s been successful at that. But if you wanted a real car company, Ralph Motors, you’d need more money than I think anyone has. Twenty billion? Fifty billion? Something like that. And then there’s two critical questions to ask:
-
If I had $20 billion, why in God’s name would I invest it in such a high-risk enterprise? I an put my $20 billion to work elsewhere. I am far safer investing $20 billion in ten thousand businesses spread across every conceivable industry and avenue of commerce. There is no conceivable rational reason to invest it all in ANY one business much less a startup car company - except ego. And ego’s a really stupid reason to start a business.
-
Suppose I did put my $20 billion into this and I actually did a good job setting it up and within 2-3 years RickJay Motors was making quality automobiles with a dealer network throughout North America. Why the hell would anyone buy my cars? What am I doing that Ford, BMW, Hyundai, Toyota/Lexus, Honda/Acura, Volvo, Mercedes, GM, Chrysler, Volkswagen, Mitsubishi, Nissan/Infiniti, Kia, Land Rover, etc. etc. etc. aren’t doing now?As it is the customer is presented with an orgy of high quality automobiles at every price point. If I get 5% of the market share it’d be a marketing miracle, and I’m not making enough money at that volume to make back my startup costs.
If you want to get rich with your own car company you’ve gotta Musk it. Musk is a genius; he’s getting rich on taxpayer money and getting to build cool cars (and they are super cool, no doubt.)
it’s not impossible (see: Tesla) but you damn well better have something unique. 'cos if you’re just going to come in and try to play in the standard compact-through-midsize car/CUV segment, you’re walking into a saturated market and it’s going to be almost impossible to gain a foothold. you’re an unknown brand with no history. Even established brands have difficulty surviving; SAAB died because they only sold vehicles which played in those saturated segments, and the number of people who care where the ignition switch is placed weren’t enough to sustain them.
he also bought an existing (idle) plant for cheap, and also was fortunate that he had a huge talent pool to hire from as the existing automakers were going through massive layoffs and buyouts/early retirements.
Even if you have the resources, timing is crucial. Just ask Hyundai/Kia. They had been around for a long time in Korea, but the timing had to be just right for them to gain the kind of global market share they have now.
I think the best strategy now would be to build a brand in emerging markets, maybe China or India, and patiently wait for the next opportunity to pounce in North America.
About the only ‘new’ car makers are in places where the mass market for cars is relatively new and the Government is supporting them.
I’m thinking primarily of China, athough I suspect Brazil and India may also have indigenous car companies that have a foothold in their regions (I’m willing to become educated on that).
Now the interesting question is if Google/Apple/Uber, etc can make it with the self-driving cars?
SAAB died because GM thought its US market badge engineering system might work in overseas markets. I always thought it was deeply, deeply ironic that the “socialist” Swedish government refused to bail out SAAB (or GM) while the capitalist US government bailed out everyone.
India has Tata Motors, which started out in locomotive manufacturing, then moved into commercial vehicles, which led to passenger vehicles. They started from scratch, but they now own Jaguar and Land Rover.
This is a big factor. The current state-of-the-art for cars is very high. Making it higher costs a lot of money. Only the big boys (Toyota, General Motors, Ford, Volkswagen, Honda) really have that kind of money.
This is why the CEO of Fiat/Chrysler has developed an obessive-compulsive desire to merge with GM, to the point where GM is telling him to go the fuck away already (pretty much in those exact words 
) Chrysler is doing OK for now, but they don’t have the R&D money, which means the company’s long-term prospects are poor. Basically, the CEO of Fiat/Chrysler is looking for a sugar daddy.
As for Tesla, they just had to raise more money to launch the Model X. I really don’t think they’ll make it. (I’m sure the Model X will have its fans, but seriously: gull-wing doors? If I’m gonna drop 120 grand on a car, I don’t want one that can’t be parked in the garage. Or a crowded parking lot. :dubious: )
Electric cars seem to have very low profitability, not just for Tesla but for everyone who makes them. Tesla’s upcoming Model 3 will remain a pipe dream for the forseeable future, because a $35,000 electric car would put them out of business.
I don’t see much reason to do an automotive startup:
- initial costs are high for everything from engineering to safety testing to factories.
- there’s a great deal of uncertainty in the market. Oil prices and unstable and it’s hard to tell what fuels will dominate in the future, and at what time. For example, five years ago, someone predicted widespread electric charging stations by 2020… but I don’t see much happening in that arena since the price of oil dropped. Even if we assume cars use gas, the price of oil changes consumer preferences about size/mileage/performance.
- While automakers are profitable overall, the fact is that even the major labels have all gone through bankruptcy, bailout and/or refinancing at various times in the past. It’s not a sure thing for anyone.
Foreign markets are a little different. Tata motors, for example, sells a $2,000 car in India that wouldn’t even be street legal in the US (due to safety regulations like air bags if memory serves). They considered a $15-20k version for the US markets, but I haven’t seen it. So there is room for innovation and new products there. (Of course, Tata is a corporate behemoth. Even that niche is not being played by a startup.)
SAAB was always going to die. GM just prolonged the inevitable by about 10 years.
SAAB was going to be revived by a rich Chinese guy-I guess the Chinese stock market collapse has put the kibosh on that. I still see a few around-I wonder how long parts will be available?
Chrysler is currently propping up the entirety of the FCA automotive empire. The Great Sergio has a few problems which have him desperate:
- Jeep and Ram are pretty much bankrolling the entire thing, and that’s not going to last forever
- The money coming in from Jeep and Ram is being wasted on trying to resuscitate a brand practically nobody cares about (Alfa Romeo)
- money wasted on Alfa is money not going to future refreshes/redesigns of the moneymaking products, which means the end of 1) is going to come soon
- the FIAT group’s traditional markets (Europe and South America) continue to be economic shit-shows.
The Swedish government owns some of the old tooling and makes spare parts under the Saab Automobile Parts brand.
ETA: Nobody in the US cares about Alfa. That is certainly not true of the Euro market.
Good ananlysis-FIAT (Brazil) has been losing money for years. the FIAT line is very old (dates back to the 1980s), and FIAT (Italy) is in very bad shape.
Gull wing doors, if properly designed, should have a swing that goes outboard considerably less than a conventional door and doesn’t raise much higher than a driver when standing; they also offer a larger useful aperature for the driver to enter for a given size. The challenges with gull wing doors are holding the weight of the door suspended when open, preventing water intrusion into the cabin, and the same chassic structural rigidity challenges of targa and tee top vehicles.
Electric cars have low profitability because the cost of the batteries is a relatively fixed cost. It is somewhat countered by the cheap operation of an electric car per mile of operation compared to gasoline, but then reversed by the need to replace a battery pack after a certain operational interval (roughly 1500 to 2000 hours of operation for a lithium ion pack, but they’re getting incrementally better). The battery also comprises a significant portion of the weight of the vehicle and poses a hard limitation on effective range. Tesla is attempting to make cars that can compete from a range standpoint with conventional gasoline automobiles at a dramatic cost penality even after government incentives. However, compact electric cars with a more limited range and battery size/cost focused on the short range commuter segment may compare favorably with gasoline automobiles in the same application, hence why most other electric vehicles ilke the Nissan Leaf aren’t trying to achieve a 300 mile range. Still, having a minimal range limits the ultimate utillity of a vehicle. Even if a 60 mile range meats 98% of a drivers needs, the other 2% of the time means that a driver has to own or hire a second vehicle to go longer distances. For intracity and nearburb commuters that may be acceptable; for those who live in the urban sprawls of most cities not on the Eastern Seaboard, it means making compromises or accepting an additional cost burden versus just buying a gasoline or hybrid vehicle that will provide essentially unlimited range. Plug-in hybrids represent a better compromise for most users, albeit one that comes at the cost and complexity of maintaining both gasoline and electric systems.
As far as new companies entering the consumer car segment, be aware that the conventional automakers invest somewhere around US$1B into a new car design, even though ‘new’ cars often leverage significantlhy off of existing components, manufacturing facilities, and suppliers. A totally new entrant has an even higher hurdle to jump. That is a lot of capital to invest in a product into an industry where there is an existing profusion of choices from which customers may have substantial brand loyalty, a heritage of reliability data, and harsh competition over secondary comfort and luxury features that are separate from the functionality as automobile. Consumers also tend to be pretty conservative about their choices; the Japanese were importing compact but well-manufactured cars into the US for well over a decade before the oil crisis of the early 'Seventies persuaded consumers to consider these ‘basic’ vehicles due to their excellent fuel economy compared to the inefficient bohemeths produced by Detroit automakers. Similarly, the now popular Korean automakers took a long time to be accepted. (The European automakers and in particular Volkswagon made better headway but largely on the cachet of being from Europe and therefore considered exotic rather than cheap ‘Jap cap’ cars.)
The automobile industry is just second to aerospace in being almost totally incomprehensible in how anyone makes a profit or manages to design and produce a workable and reliabile vehicle, and as we all know, the best way to become a millionaire in aerospace is to start with a billion dollars.
Stranger
There’s also the unique situation in India that until fairly recently the government made it virtually impossible for foreign car companies to operate in the country except in very limited partnerships with the mostly government-owned local car companies. Tata Motors sort of managed to sneak in during the period when the government was divesting itself of outright ownership of the auto industry, but before they started to drop the barriers to foreign companies coming into the country. Even today, domestic producers benefit enormously from tariffs on foreign cars.